Cryptocurrency Trades as Like-Kind-Exchanges

Cryptocurrency Trades as Like-Kind-Exchanges

Cryptocurrency Trades as Like-Kind-Exchanges The 2017 tax season is underway, and one of the hottest topics for cryptocurrency investors is the possible application of Section 1031 to capital gains on crypto-crypto transactions. As a tax specialist specializing in cryptocurrency, this is probably one of the questions am asked. Unfortunately, there is more misinformation than truth

Cryptocurrency Trades as Like-Kind-Exchanges
The 2017 tax season is underway, and one of the hottest topics for cryptocurrency investors is the possible application of Section 1031 to capital gains on crypto-crypto transactions. As a tax specialist specializing in cryptocurrency, this is probably one of the questions am asked.
Unfortunately, there is more misinformation than truth about exchanges of the same nature. Many cryptocurrency investors have serious misunderstandings about the advantages (and disadvantages) of processing their crypto-crypto transactions like exchanges of the same kind under Section 1031.
Section 1031 generally allows taxpayers to defer gain or obtain a loss in the nature of a taxpayer’s economic situation after the exchange of the fundamentally prior to the exchange. Koch c. Commissioner, 71 T.C. 54 (T.C. 1978).

Under Section 1031, a transaction must meet three conditions:

1. Exchange of property
From the outset, an exchange of the same nature must in fact constitute an exchange, that is, not a sale. This usually involves a transfer of ownership between two parties. The exchange of property must occur in a mutually dependent manner. The involvement of a third party in the rate of change allowed, to the extent that there are no cash or other types of change in the transaction. In the case of goods in cash or similar goods (called “boot”), the third party must be a qualified intermediary within the meaning of Treas. Reg. 1.1031 (k). Otherwise, the receipt in the transaction will trigger the gain recognition.

2. Use of the property
In addition to the exchange requirement, the property transferred and the property received must be held for investment purposes. The decision to determine whether the property is held for the purpose of business or investment “is based on the intention of the taxpayer at the time of the exchange. If the taxpayer does not intend to immediately liquidate the property or use it for personal pursuits, the property is generally considered to be held for productive use in a trade or business or for investment. This is true even if the property is actually exchanged immediately after its acquisition.
In the case of most crypto-crypto transactions, this requirement is probably satisfied. However, the determination will be different from that of taxpayers and must be made on a case-by-case basis. Taxpayers who exchange crypto held for personal use or for sale at this meeting.

3. Similar Property
By virtue of the third requirement, ownership of the property must be similar to nature. Section 1031 does not exclude certain types of similar property (such as shares, bonds, securities, partnership interests and things in action). The regulations in Section 1031 provide some precision, stating “as used in Section 1031 (a), the words” like “.
Thus, the properties involved in the exchange of the same nature, although they are of the same nature or character. As explained by the Tax Court in Koch. “Indeed, the IRS for the effect of making the exchange of money with the taxpayer.” Indeed, the IRS has “that the narrowest interpretation of the standard type does not work that they are completely interchangeable.

The bottom line is that crypto-crypto transactions can technically qualify similar trades, but this qualification is at best uncertain. There is no need for such exchanges, but some authority is no guarantee that the IRS accepted this treatment. In the event, IRS takes a contrary position, taxpayers to be able to deal with the same thing. Alternatively, taxpayers may disclose a treatment on Form 8275 and then need to establish a “reasonable basis”, which is a lower standard. At the end of the day, taxpayers should consider applying for a tax exemption.